While the fund has delivered the volatility pledge, barely budging in reaction to China growth fears in 2015 and 2016, or to Brexit and the election of Donald Trump as president of the US, it has missed its return target by a significant amount (see chart below).
“We are looking to deliver an outcome irrespective of market conditions,” Nunan told FSA on a recent visit to Hong Kong.
“[In 2017] we were positioned for higher inflation, for the yield curve steepening and bonds selling off,” he said. However, “the spreads continued to tighten, the curve continued to flatten and [trades that benefit from] duration continued to rally. There were also challenges around the collapse in volatility that were really very difficult for us.”
Collection of strategies
A multi-strategy fund should not be confused with a mixed-asset fund. While the latter type aims to generate alpha from allocation among asset classes, a multi-strategy fund employs a range of strategies, each meant to target an investment theme.
“For example, if we think we’re in an inflationary environment, growth is good and central banks are going to raise rates, we identify a number of individual strategies that will play on this theme,” Nunan said. “You might like the banking sector, because banks will benefit from higher interest rates, or you’d like exposure to inflation-protected securities, or you’d like some risk assets which are going to do well when global growth is good.”
The first part of the investment process is generation of ideas, which are then vetted against the house macroeconomic view. If an idea is approved, after a debate, it becomes part of an idea universe. Each idea corresponds to an investment strategy, such as “long European equities” or “short UK long-end rates”. The fund manager then typically chooses between 25 and 35 strategies to construct a portfolio that is best positioned to deliver the target risk-return profile.
“We’re agnostic about how we implement the strategies,” Nunan said. The typical vehicles are portfolios of equities or bonds managed by other fund managers, as well as interest rate, currency or volatility derivatives. The only limitations to the mandate of the fund come from the Sicav regulations, which differentiate it from what otherwise would resemble a hedge fund.
If an allocation is made to an actively-managed portfolio of securities, they typically are managed by other Aviva Investors managers on a cost-free basis, to avoid layering of fees, according to Nunan.
Balance of conviction
“For 2018, our view is very much the same,” Nunan said. “Fundamentally, we believe that the inflationary pressure is building and we’re happy to stick with our thesis. We target a three-year investment horizon.
“We have increased our exposure to financials, taken down some of our credit exposure in areas like US high yield, and added a bit more to emerging market local currency debt.
“The real challenge is about the right balance in terms of conviction,” Nunan continued. “On the one hand having the courage of your convictions and not collapsing when things don’t go your way, and on the other recognising that the market is never wrong.
“You don’t want to throw the baby out with the bathwater and say this thematic isn’t working and we are going to abandon it. But on the other hand you have to recognise that actually markets can remain irrational longer than you remain liquid.”
Decisions are easier in terms of individual strategies. A strategy would be abandoned when it becomes apparent that it does not behave in the way it was expected to. “For example, if a defensive leg of your strategy does not provide positive returns during periods of market stress, it isn’t doing what we’re asking for from it.”
The fund is managed by a team of four co-managers based in London: Dan James, Peter Fitzgerald, Ian Pizer and Brendan Walsh.